In Brexit Britain, battling home lenders chase risk and pensioners

LONDON: The framed coat of arms hanging in the headquarters of the Hanley Economic Building Society in Stoke-on-Trent depicts two squirrels in ermine robes above the motto ‘Save Safely, Build Surely’, which the mortgage lender’s customers have duly done for over 150 years.
Now with Brexit looming, rock-bottom interest rates squeezing margins, and behemoth competitors cratering loan prices, ‘The Hanley’ as it is affectionately known in its central England hometown, is taking some radical steps.
In the past year, the lender has started offering more high risk loans, targeted borrowers in their 70s and 80s and launched an interest-only mortgage aimed at retirees that lasts up to 55 years — the principal is repaid when the borrower dies or moves into a nursing home.
The Hanley is one of just 43 building societies left from the hundreds that sprung up in Britain in the late 18th century. Community-focused and customer-owned, they are lenders with a traditionally conservative approach and account for around 23 per cent of mortgage lending in the UK.
Across Britain, smaller players in the £1.4 trillion ($1.77 trillion) mortgage market — building societies among them — are seeking out niche segments and taking on more risk as they try to compete in a price war with the biggest banks.
A post-financial crisis housing market boom along with record employment levels have so far kept default rates at decade lows.
The fierce competition on price may be good for consumers, but if Britain’s exit from the European Union leads to a dramatic slump, analysts and consumer experts warn that debts and loan losses could overwhelm some borrowers and lenders.
“The increase in mortgages available for older borrowers has been a positive development, but some of these products have not been tested in a severe downturn,” said Gareth Shaw, personal finance expert at consumer advice firm Which?.
Unlike the United States, where banks have pulled back from the mortgage market in the wake of the financial crisis, Britain’s largest lenders have maintained a steady grip.
Regulations introduced in January have also had the unintended consequence of strengthening the hands of the big five banks — Lloyds Banking Group, Santander, Royal Bank of Scotland, Barclays and HSBC.
Along with Nationwide Building Society, the No 2 mortgage provider which has made a push into lending to older customers, those six lenders have held 70 per cent of the market since 2009, according to data from UK Finance.
Nationwide said lending to older people had great potential.
“Later life lending is a fast growing sector which, given UK demographic trends, we believe has the potential to grow into a material part of the market,” said Henry Jordan, Nationwide’s Director of Mortgages.
Forced to separate their retail divisions from their riskier investment banking operations, large banks have been left with little choice but to push deeper into mortgages to earn a return on the pools of customer deposits ringfenced by the split.
The increased competition has cut prices on mortgages, particularly riskier products with a high loan to value ratio (LTV) — the higher the loan to value ratio, the greater the risk of default if house prices fall.
“In competition terms it’s predatory pricing. The use of a scale advantage to disadvantage competitors,” said Ian Smith, chief financial officer of mid-sized lender Clydesdale Bank (CYBG).
A HSBC spokesman said the bank’s strategy to expand in British home loans had been set in 2015, adding its strategy “remains positive for consumers”. Santander said it was focussed on “sustainable growth” and had a conservative approach to risk.
— Reuters